First lets recap on the steps generally involved in a successful mortgage application.
Basic steps involved in all mortgage applications
Calculate your budget and the amount you need to borrow. There will always be additional costs over and above the purchase price when buying property. These include legal fees and taxes, property registration fees, valuation fees and loan application fees. Allow at least 10% for costs over and above the purchase price - this means if your property is going to cost 200,000 your actual cost will be at least 220,000. You will also need to make an allowance for furnishing your new property or transporting existing furniture, either of which will be expensive. Remember too to allow for inspection visit costs and subsequent visits to complete documents.
Normally, you will need to be able to produce some cash to part-finance your purchase. While 100% mortgages are available, they are much harder to arrange and often have higher interest rates. Most lenders will only lend up to 80% of the purchase price.
All lenders consider the ability of the borrower to repay as their most important criterion. While the lender will always insist on using the property to be purchased as security against the loan, they try very hard to avoid having to foreclose and seize the property. So having a sustainable, provable income is nearly always essential to making a successful application, although there are exceptions to the rule. Apart from the percentage loan to value cap on the purchase, most lenders will also place a cap on your monthly repayments of a maximum of two thirds of your disposable income. Thus, if you earn 1000 per month after all state deductions and you have existing loan commitments of 400 per month, your disposable income is 600 per month. Lenders will restrict the amount you can borrow so that your repayments cannot exceed 400 per month.
Consider using a reputable mortgage broker to assist in obtaining a loan. Different lenders target different types of clients. Some lenders target higher-risk type clients, others use strict vetting and will only offer a mortgage to those who pass the vetting procedure.
If you approach a lender directly you probably will not know whether you fit into their ideal customer category. You may provide them with too little information or too much information, resulting in them declining your application. This refusal may then be posted with credit checking agencies which in turn makes it more difficult to get a loan offer from another institution.
Based on the information you provide, a broker will know from experience which lenders will look most favourably on your application. This can save you considerable time, money and most of all will not cause credit rating problems.
Virtually all lenders charge the borrower an arrangement fee. This fee is normally applied whether you arrange the mortgage directly or via a broker. The lender pays the broker a percentage of the arrangement fee, so normally nothing is added on to your overall costs. Some brokers will charge you an application fee. This is normally fairly small and reputable brokers will advise proceeding with the application only if they are as certain as they can be that the application will be successful.
Additional factors for foreign purchases
The most important additional factors in foreign purchases are:
- Differences in local law.
- Currency considerations.
- In which country you raise the loan.
When purchasing in your home country, you will probably have some grasp of the legal and tax situation with regard to your purchase. Armed with this knowledge, you may need legal assistance only for the completion of the sale. However, when purchasing abroad, I recommend you seek sound legal advise from a local lawyer right at the start. You need to examine inheritance and tax laws among others. Your status in the target country (resident or non-resident) may also affect aspects of your purchase.
When purchasing abroad you may need to factor in currency exchange rates, and you will definitely need to factor in money transfer costs. You will need to discuss these with your home bank and your target country bank as both are likely to charge transfer fees.
Exchange rates always fluctuate, sometimes by a lot over a short time. You can arrange to buy your target currency in advance (this involves the exchange bureau or bank agreeing to a fixed forward exchange rate for a specified time - the longer the time specified the less favourable the rate).
If you fail to do this and your home currency declines against the target currency, your available budget will be lower. A significant fall in the value of your home currency during the period between contract signing and completion could cause you serious financial problems.
You could also opt to transfer all your money into the target currency before beginning your property search. In essence, it is absolutely vital to know exactly how much you have to spend in the local currency. Exchange bureaux often offer better exchange rates than the major banks.
In which country should you borrow?
This is a difficult one to answer precisely. The actual rates of interest charged are obviously a factor. But you also need to compare the economic performance of the two countries over the last ten years or so. Decide on which is the most stable - if one country's interest rates have fluctuated by large amounts while the other's has remained reasonably stable your decision will be easier.
No matter where you borrow, your loan interest rate will be subject to fluctuations. If you borrow in your home country you may have ongoing exchange rate fluctuations to bear in mind. If you intend to meet your monthly repayments from income derived in your home country, then it's probably best to borrow there. If, on the other hand, your repayments will be met from income generated in your target country (for example, you intend to rent out your property abroad), it makes sense to borrow there.
The key thing is to try and eliminate as far as possible any factors which may in the future cause you problems meeting your repayments.
William Kenny is the owner of http://www.estateagentsespana.com, a resource specifically for people wanting to buy property in Spain. The site has other useful articles which can be applied to purchases and relocation elsewhere.